Art of investing by inertia

Gautam Chikermane The Indian Express Thursday, January 05, 2006

Self-Control, inertia, procrastination. Human, touchable, endearing terms. But coming from an economist, you wonder whether he’s turned bananas or whether economics is getting more compassionate. An exclusive chat with Richard H. Thaler presented the answer — it is the latter. A professor of behavioural science and economics at the Graduate School of Business, University of Chicago, Thaler will talk about how individuals can use their psychological behaviours to increase savings — and how policymakers can design policies that help individuals do that. Essentially, he will talk about Save More Tomorrow (SMT).

Essentially, what Thaler proposes to do is to use individuals’ saving and investment inertia to turn the tables such that they ended up better off. Between the first implementation of the programme in 1998 and now, when big mutual funds like Vanguard and Fidelity are using the plan to offer products, the model has been “quite successful”, Thaler told us in a closed-door meeting earlier this week. And the main reason why this is working is amusing. According to Thaler: “One reason why the plan works so well is that inertia is so powerful. Once people enrol in the plan, few opt out. The plan takes precisely the same behavioural tendency that induces people to postpone saving indefinitely (procrastination and inertia) and puts it to use.”

The other theme he explored during his 90 minute presentation was the nature of the default option. Under Thaler’s theorem, could we begin to think about a default option that incorporates a 1:1 ratio between debt and equity, something that will allow subscribers to have a far greater surplus when they finally retire, a few decades from now?

Tailpiece: At a Sensex of 9,648 and rushing towards the 10,000 mark every trading day, the risk of market timing has gone up manifold — and rises with every century rise in the Sensex. While we’ve always argued that people should invest in stocks only if they can hold them through the downs — that inevitably follow a rise and which is what volatility is all about — the argument couldn’t be stronger today. Sure there’s money to be made still, but invest in time, not in timing, is what I would suggest, very, very emphatically.